Comparing Developmental Paths in East Asia, Latin America and Africa

During the 20th century, nations from the regions of East Asia, Latin America and Africa all sought to become globally competitive through industrialisation. Some, like the East Asian Tigers, succeeded while others experienced tumultuous results (Latin America) or did not achieve development at all (Africa). This essay will be comparing each region and their general paths to industrialisation (or lack thereof). It will be examining the success of the East Asian economies, the policy shifts of Latin America and the failure to develop of African economies. This essay will then examine if there are any lessons that the successful East Asian economies can spread to the other regions. This essay will ultimately find that the differing successes of each path can be found in the effectiveness of their institutions, with East Asian institutions being effective at creating an environment conducive to private investment and capable of implementing policy.

The East Asian Tigers

The East Asian states ultimately succeeded in industrialisation due to effective institutions that promoted an export-orientated strategy reinforced by good human capital and conducive global affairs. A common factor between all the East Asian economies is that they all promoted manufactured exports somewhere along the line and all possessed competent bureaucracies.[1]

Human capital and its development is integral to understanding how Asian economies boosted their production and were able to staff their institutions.[2] East Asian states, notably Japan, benefitted from a large pool of cheap, flexible and skilled labour.[3] Japan, in particular, benefited from a long history of productive labour from before World War 2, which only needed to be re-organised and restored.[4] East Asian states had the desire to become globally competitive. They accomplished this through harnessing and developing their comparative advantage – their labour. Workers were required to be versatile to adjust to changing production methods, but were ensured job security – mitigating any possible opposition to their low wages.[5] Workers were effective and managerial relations were warm due to a low wage gap.[6] Investment was also put into education, increasing worker productivity and creating a steady supply of graduates to staff the bureaucracy.[7] Superior human capital allowed manufacturing to be cheap and for the products (especially in Taiwan’s case) to be of a superior quality to foreign competitors.

Evans (1998) argued that all competing theories of East Asian development share the assumption that each economy benefited from effective institutions which cooperated with business.[8] East Asian institutions were not universally incorruptible, but each state did have a dominating agency which directed its affairs.[9] These institutions were typically meritocratic and competent.[10] The Japanese Ministry of International Trade and Industry (MITI) is often cited as an example of a small, merit-based bureaucracy which uses persuasion to guide economic development.[11] These institutions did not develop in a vacuum, however, but in a process of struggle after World War 2.[12] Asian states were able to secure skilled bureaucrats for their ‘pilot agencies’ through providing wages that could compete with private sector positions.[13] After securing skilled bureaucrats, institutions were able to effectively formulate and implement industrial policy. This was in the form of influencing businesses through a process of reward and punishment based on performance. MITI, for instance, was able to secure private sector performance through information sharing and influencing them in such a way that did not violate market rules.[14] This will later be contrasted with the Latin American institutions which were able to formulate industrial policy, but struggled to implement and maintain it. Policy had mixed results in all East Asian economies, but the common factor is that they all had effective institutions, working in tandem with private businesses to implement said policy.[15] Ultimately, East Asian institutions created an environment desirable for private investment.[16]

The years after World War 2, despite requiring reconstruction and recovery, did possess factors that benefited some of the states. Japan, among others, benefited from cheap energy (until the 1973 Oil Crisis), aid from the United States (due to the Policy of Containment), American tech deals and increased global trade due to American consumption.[17] It must be noted that these factors did not equally benefit Africa and Latin America, as the former tended to suffer more from the global market and the latter did not effectively harness the global market due to its protectionist policies.

Ultimately, East Asia developed due to focusing on exports and being able to raise their production to achieve global competitiveness.[18] They were able to achieve this productivity through good human capital, institutions that could effectively formulate and implement policy in tandem with businesses and a conducive global environment.

Latin American Policy-Shifts

The Latin American context must be examined through its shifting policy and tumultuous politics. Due to its unstable politics and changing policies, Latin America is seen as a “laboratory” for testing different developmental policies as, throughout the 20th century, it experienced many different types of policy prescriptions. The intellectual backing for the policies of many Latin American economies can be found in the Economic Commission for Latin America (ECLA).[19] ECLA and economist, Raúl Prebisch, formulated the idea of periphery and centre economies, and determined that periphery states (Latin America being a part of this) were losing out due to not controlling the terms of trading primary goods and thus were underdeveloped.[20] As such, ECLA embraced Import Substitution Industrialisation (ISI) as a growth strategy in the 1940s, as the policy seemed to provide a sense of safety after the volatility of the world market during the Great Depression and WW2.[21] ECLA set forth on the assumption that periphery nations had to develop a different path from the centre nations, and only through ISI-wrought industrialisation could they become competitive. They argued that protectionism was necessary to combat the unfair trade terms of centre nations.[22] As such, they wanted to focus on developing an internal market, and did so through the ISI strategy.[23] This policy seemed to work for a time. In Brazil, a combination of state entrepreneurship and ISI led to the growth of an auto-industry, designed to complement the growth of other industries through protectionism blocking other imports.[24]

But Brazil, among other Latin American states, did not wholly succeed in their development. ISI strategies led to balance of payment issues, especially after the Oil Crisis.[25] States had to borrow large sums of money just to maintain the affairs of the state, rather than to invest in development. East Asian states were much more efficient in balancing their budgets, as they kept deficits manageable through effective fiscal and monetary policy.[26] Latin American states were much less effective in their fiscal policy, going into heavy debt. Drawing a contrast between East Asia and Latin America led to a ‘Latin American consensus’ that determined that effective macroeconomic management was one differentiating factor between East Asia and Latin America.[27] As a result of a failure to maintain a conducive macroeconomic environment for private investment, many Latin American states failed, leading to ECLA changing its prescriptions in 1990 to liberalisation to encourage growth.[28] To back up this new prescription, recovery of the Brazilian economy does seem to correlate with deregulation.[29]

Latin American institutions, primarily those in Brazil, were effective in being entrepreneurial and starting up state initiatives to grow the economy, but were not effective enough to maintain the macroeconomic environment and the initiatives in the long-term. This is to be expected from a region rife with civil war and coups, which were no doubt disruptive to institutions, which would have struggled to trust one another or receive trust from the citizenry and business. The vital contrast with East Asia may be this lack of institutional stability and effectiveness, coupled with ignoring investment in human capital, by neglecting strong education and information diffusion in the economy.

Africa and Failed Institutions

In studying Africa, it is more a case of studying why Africa did not develop than how it did. Due to a combination of the legacy of colonialism and post-colonial conflict, Africa suffers from a paucity of effective institutions, resulting in a lack of ability to implement and maintain policy. Ineffective institutions meant that Africa was unable to pursue any developmental path, as an entrepreneurial state or through simply creating a conducive environment for private investment. African states were unable to create a stable foundation for either developmental path, fermenting distrust in the state and in society. Hyden et al (2003) put forward that Africa’s fundamental failure is due to its inferior bureaucracy, while East Asian success is due to it.[30]

Much of Africa’s present distress can be blamed on the legacy of colonialism, as the colonial governments left many nations with institutions ill-fit for promoting development.[31] The nature of colonial states was primarily authoritarian, creating a sense of alienation between people and the state.[32] This continued after independence, as many African leaders used the state as a source of wealth to be extracted.[33] Leaders were highly corrupt and personalistic, often using public funds to maintain their power through the military, rather than spending on development.[34] Due to a fear of private interests challenging their control, many African leaders restrained the growth of the private sector.[35] Because of this lack of investment in development, Africans are primary consumers of imported goods, leading to major balance of payment issues.[36] Production is fundamentally based around the export of primary goods, which makes these economies more susceptible to the volatility of the commodity market as well as leading to little investment into manufacturing or the development of human or other types of capital.[37] Leaders are unwilling to change these practices due to habit, difficulty and a fear that they may loosen their control.

Fundamentally, the failure of Africa is in its inability to direct policy due to historically weak institutions and an unwillingness to organise better institutions.

Institutions: A Prerequisite to Success

A myriad of studies has shown that good institutions are integral to development.[38] Effective institutions are necessary to pass whatever policies a nation needs, as well as maintaining an environment for private interests to interact and invest. Even more so, a competent and trustworthy bureaucracy is fundamental to cementing trust in the population, which is needed for policies to be smoothly implemented and obeyed.[39] As Evans (1998) accurately argued, the most pertinent lesson from the successful East Asian economies is that developing nations need effective institutions which cooperate with business while remaining powerful and independent enough to enact policy.[40] East Asia had such institutions, while the other regions did not, but a good bureaucracy is not innate to Asia. They are the results of intense hard work and experimentation.[41] Constructing decent institutions in Asia was hard, and will be hard everywhere – but it is possible.[42] Nations wishing to replicate the Asian miracle will need to adapt the lessons to their contexts, taking into account the personalistic nature of African institutions or the instability of the Latin American bureaucracy.[43] There are skilled civil servants in all these regions, and the goal should be to concentrate these decent individuals into pilot agencies which can be used to drive development.[44]

The largest barrier to the adoption of the East Asian model is that while East Asia was generally and relatively equal in terms of wages and homogenous in terms of culture, many African and Latin American nations are highly unequal and culturally divided.[45] Institutions in Latin America have often been dominated by populist sentiments which restrain them from cooperating with business. This is due to inequality driving a fear that the rich will manipulate institutions.[46] As hard as it may be, it is still possible to adapt. What is clear is that institutions, regardless of which developmental school of thought one subscribes to, are crucial to development.

Conclusion

This essay has dealt with a large topic in a limited fashion. While there are scores of different views on developmental paths, their interaction and their replication, this essay could only deal with a few. Some other merit-worthy theories to investigate may be that of Alice Amsden’s views on technology and studies on the specific policies that East Asian economies adopted. This essay fundamentally approached this question from the viewpoint that institutions are integral to development, and has presented evidence to support this fact. While policies and strategies differed throughout East Asia, what is common is that they all possessed competent institutions that were able to simultaneously manage macroeconomic affairs, while working in tandem with business to develop and implement policy. Latin America, while having temporary policy successes, struggled due to institutions that were unable to effectively manage their macroeconomic policy or maintain their initiatives. Africa ultimately failed to develop their institutions or achieve development due to a myriad of factors leading to personalistic and corrupt leaders. While it may be difficult, it should be possible for other states to adopt the East Asian model through developing their own institutions.

Ultimately, this essay has shown how institutions are integral to development and how East Asia succeeded as a result of their effective institutions.

References

Akgün, Birol, and Şaban H. Çalış. “Reluctant Giant: The Rise of Japan and its role in the Post-Cold War era.” Center for Strategic Research, 2003, 1-13.

Page, John “The East Asian Miracle and the Latin American Consensus: Can the Twain Ever Meet?” In Pathways to Growth: Comparing East Asia and Latin America, edited by Nancy Birdsall and Frederick Jaspersen, 14-56. New York: Inter-American Development Bank, 1997.

Sikkink, Kathryn. “Development Ideas in Latin America: Paradigm Shift and the Economic Commission for Latin America.” In International Development and the Social Sciences, edited by Frederick Cooper and Randall Packard, 228-256. Los Angeles: University of California Press, 1997.

Footnotes

[1] John Page, “The East Asian Miracle and the Latin American Consensus: Can the Twain Ever Meet?” in Pathways to Growth: Comparing East Asia and Latin America, eds. Nancy Birdsall and Frederick Jaspersen (New York: Inter-American Development Bank, 1997), 23. Hong Kong began with light industry and manufacturing but began to shift towards financial services later on.

[9] Ibid., 71-72. Examples of these ‘pilot-agencies’ (as they are referred to by Wade) would be MITI for Japan and EPB for South Korea. There are some exceptions to this rule, as Singapore worked well relatively decentralised agencies, which did receive direction by an EPB and the Ministry of Finance.

[19] Kathryn Sikkink, “Development Ideas in Latin America: Paradigm Shift and the Economic Commission for Latin America,” in International Development and the Social Sciences, eds. Frederick Cooper and Randall Packard (Los Angeles: University of California Press, 1997), 228.